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Zillow's IPO: Bellwether of a New Boom?

Is the market for tech companies warming up?

Trying to read too much significance into any single event in business can be a dicey proposition. But when we're talking about a well-known Seattle tech-company IPO -- something the innovation community here hasn't seen in quite a while -- it's worth chewing over what the development could say about the months and years ahead.

The IPO filing by online real-estate company Zillow earlier this week wasn't a huge surprise -- the company had been talking about taking the IPO plunge for months, and one of its chief competitors, San Francisco-based Trulia, has been pretty noisy about the same idea.

There were, however, some relatively odd notes to Zillow's IPO. First of all, the company's numbers are not mind-blowing: Zillow is not profitable, despite some hints to the contrary from executives last year, although its annual losses are narrowing. Revenues are growing, but the company's 2010 haul was only about $30.5 million. Although it was never going to be a LinkedIn-size IPO, Zillow is still smaller than recent consumer-oriented tech companies that have either gone public (Zipcar(Nasdaq: ZIP)) or filed the necessary paperwork to make it happen (Pandora).

So the fact that Zillow feels it can come out now looks like another bit of evidence that the market for tech companies is gaining heat, fed by the pent-up demand for deals building since the Great Recession and the near-evaporation of the U.S. financial system.

Zillow isn't seeking that much money -- about $52 million, far below what some tech companies are asking for as many see the IPO market gaining steam.

"It's small, but I always remember when Adobe(Nasdaq: ADBE) went public -- it raised $6 million, and that's a pretty decent company today," says Bill Bryant of Draper Fisher Jurvetson and Envision Ventures. "The objective is to increase the share price for all investors, and if you don't need the money, you don't need the money."

Of course, one of the most-watched things from the entrepreneur side is how much new money an IPO could wind up injecting into the local innovation scene. If Zillow pulls off this deal, it will bring in fresh capital from around the country that it can use to expand locally, and it provides the possibility of liquid returns for its senior management and employees. Because Seattle's startup community typically winds up raising most of its money from nearby investors, an honest-to-goodness technology IPO can get people's heart rates up.

"A great technology IPO is one of the most positive things that can happen to the technology-investment community," says entrepreneur Dan Shapiro, founder of Sparkbuy. "On the front side, it creates new angel investors who can get into the game, and on the back side, it's the big shining light at the end of the tunnel for all the years of hard labor."

Part of the reason Zillow's IPO might also loom larger than an individual action is the tantalizing thought that many more could be coming. PopCap Games, for instance, has made no secret of its desire to get to the public market soon -- between Labor Day and Thanksgiving if possible, and certainly before social-gaming giant Zynga comes along and steals a bunch of thunder. Plus, a solid IPO pipeline has been lacking in this region -- and that may be starting to change. On Thursday, Seattle-based RFID company Impinj also filed papers for an IPO, seeking as much as $100 million.

"You've got to go public before you can get your name on the building, and that dream has been largely gone for the better part of 10 years here," Bryant says. "It's been a very difficult time, and an acquisition has really been the only route to liquidity." Bryant also notes that the last tech IPO from this region, Motricity's (Nasdaq: MOTR)lackluster 2010 entry, wasn't really a homegrown affair, since it was a North Carolina company that relocated to Bellevue, Wash., after buying a piece of dot-com leftover InfoSpace(Nasdaq: INSP).

Of course, that's presuming a Zillow IPO is consummated. Filing an S-1 form with federal regulators is just the first step, and companies have been known to use the format as proactive due diligence and buzz-building. That can force prospective buyers to ante up with a big acquisition, or else risk letting the smaller company scoop up a lot more resources as an independent, publicly traded company.

It's hard to say how viable Zillow's IPO prospects really are at this early stage, but some observers weren't exactly bowled over by the company. Fortune's Duff McDonald wrote how disappointed he was that Zillow didn't smash the real estate "cabal," similar to how travel websites busted up opaque agency and airfare systems. He said Zillow has instead become "nothing more than real estate porn … merely looking to cash out its beleaguered venture investors, who have to date sunk $87 million into the business." Ouch!

Another interesting feature of Zillow's filing was the strong control being maintained by the co-founders, Rich Barton and Lloyd Frink. Although Zillow has indeed taken nearly $90 million from investors over its six or so years, Barton and Frink hold nearly 90% of the voting power. And even after going public, the founders will continue to control all of the Class B stock, special shares that give them 10-to-1 voting rights. In its SEC filing, Zillow acknowledged that this structure could hurt its stock price, since Barton and Frink "together will be able to control all matters submitted to our shareholders for approval."

"There's an interesting trend here in these tech IPOs where the company is saying the founders know best, and that stockholders are in effect going to be in the passenger seat in the long-term management of the company," Shapiro says. "With Google, everybody got comfortable with that and remains comfortable with that by all accounts, based on their stock price. … Zillow is banking that they're going to have the same reaction."

But there's a very big gulf between Google and Zillow. Entress chalks it up to the experience of the founders, who were also original figures at Bellevue-based Expedia(Nasdaq: EXPE). "Rich Barton in particular is viewed as like the uber-entrepreneur in Seattle," Entress says. "So if anybody's going to get away with it here in Seattle, it's Rich."

If Zillow does meet its goals for this IPO filing, whatever those may be, it'll be a success story in more ways than one. The company has certainly seen more than its share of rough markets in recent years, and the fact that it's still around and appears headed toward profitability at some point is kind of remarkable on its own.

"Obviously, Zillow's really exciting now," entrepreneur Tony Wright says. "But if you think about the fact that they've managed to become exciting in the midst of the biggest real estate apocalypse of our age, that's pretty cool. There is that truism that a lot of the best companies are built in the worst times. A lot of the companies that are sort of hitting now started right after the first dot-com bust."

Curt Woodward is senior editor at Xconomy Seattle. You can e-mail him at cwoodward@xconomy.com and follow him on Twitter, @curtwoodward.